An Extraordinary Moment for Europe as Euro Becomes Everyday

PARIS— In the biggest currency swap in history, more than 300 million Europeans in 12 countries will start using the euro as their day-to-day money Tuesday, irrevocably casting their old marks, francs, lire, pesetas and other national currencies into the trash can of history.

In the short term, the switchover is certain to bring some chaos. But in historical terms, it is likely to be seen as one of the defining moments in the development of European union.

The European Central Bank said that more than 15 billion banknotes worth more than €630 billion ($557 billion) had been produced along with more than 51 billion coins worth €16 billion, and much has been moved in a matter of weeks to banks and stores in one of the biggest logistic exercises ever undertaken. Engineers were working over the holiday period to reprogram hundreds of thousands of automated-teller and vending machines.

Part of the newly minted and printed cash will move straight from printing plants to bank vaults around the world, where they will be kept in reserve. Possibly only about 7 percent or 8 percent of the new notes and coins actually will fill people's pocketbooks in coming weeks.

The old notes and coins will continue to circulate for a few more weeks alongside the seven new notes ranging in value from €5 to €500 and eight coins valued from 1 cent to €2. As the old currencies are handed over at shop tills and banks, they will be removed from circulation and destroyed. From the end of February, all 12 countries' notes and coins will be replaced, and the euro will then be the only legal tender in the entire region.

Banks will continue to exchange the old currencies until July. After that, national central banks have agreed to redeem the old notes at face value for many years, or indefinitely in many cases. Nevertheless, governments are expected to collect a large windfall from old notes that never are redeemed.

The euro "will be far more than a single currency for Europe," said Walter Eversheim, a spokesman for the committee that awards the International Charlemagne prize for the greatest contribution to European unity, which this year has been awarded to the currency. "It will contribute to a common European identity, stabilize the community and foster peace."

But others warn that bringing together 12 nations with different tax systems and diverse economies will create irresistible strains. What will happen, critics ask, if one part of the euro zone needs easy credit and another part tight credit?

At one extreme, Martin Feldstein, a Harvard University economist, has warned that the euro could "reinforce long-standing animosities based on history, nationality and religion" and lead to open conflict. But many constitutional experts maintain that if the euro is a success, it will inevitably lead to a closer union and more economic integration, and perhaps eventually to a degree of harmonization of taxes.

"In the longer term, I can imagine a Europe tax," said Finance Minister Hans Eichel of Germany.

Romano Prodi, president of the European Commission, predicts more "economic government" in which the informal group of 12 finance ministers from the euro-zone countries would gradually begin to behave more like the policy-setting U.S. Treasury Department.

To join the single currency system, countries already have had to hand over monetary policy-making to the European Central Bank in Frankfurt and submit themselves to tight budgetary and credit discipline, or risk paying onerous fines under an agreement called the Stability and Growth Pact. Germany insisted on the pact because of fears that it would have to bail out profligate members such as Italy. Ironically, Germany today is the country most in danger of breaching the terms.

The euro enters the world at a difficult time, when economies are slowing and Europe is still hidebound by structural rigidities. Labor markets, for example, are more inflexible than those in the United States because language and tradition make it difficult for people to move to another country in search of work.

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But as Jean-Claude Trichet, governor of the French central bank, is fond of saying, the euro itself is a vastly underestimated structural reform, rivaling in importance the Bretton Woods system that formed the basis of postwar economic recovery.

The new currency has been many years in the making. It is rooted in the 1986 act establishing a single European market for people, goods and capital, and the 1992 Treaty on European Union. For years, countries held their currencies in close alignment before fixing exchange rates irrevocably on Jan. 1, 1999, when the existing national currencies actually became subunits of the euro.

While the new notes and coins were being produced, the euro has existed as a virtual currency for electronic transfers. For example, between 70 and 80 percent of U.S. trade with the European Union already is denominated in euros. So while the introduction of the notes and coins may come as a cultural shock to Europeans, the currency already has been absorbed by the banking and financial system.

As a virtual currency, the euro started off boldly with an international value exceeding $1.17. By October 2000, its value had declined to a record low of 85 cents. It has since climbed back, and was trading at 88.41 cents in New York late Friday.

The decline has never overly concerned the European Central Bank, which has maintained low inflation within the euro zone and which points out that without the euro, governments would be overwhelmed by speculative financial movements in a global economy.

Whatever its strength against the dollar, the euro already is a global currency in every sense of the word. Its 306 million users in 12 countries, including three of the world's seven biggest industrial powers, account for a sixth of the global economy. The euro takes over from the Deutsche mark as the world's second most widely used reserve currency after the dollar. It will replace the Deutsche mark as the shadow currency across Eastern and Central Europe. Across North Africa, it will replace the French franc as a parallel currency.

The euro will become the most widely circulating currency in Europe since the denarius of the Roman Empire.

Over the years, the single currency zone is likely to grow. East European countries that are waiting, along with Cyprus and Malta, to join the EU also hope to qualify as members of the monetary system. Three EU member countries — Britain, Sweden and Denmark — are remaining outside the system but will be pulled into its orbit.

"With so much of our trade and so many of our jobs tied up in business with the rest of Europe, it is massively in our interests that the euro succeeds," said Prime Minister Tony Blair of Britain, who plans to put the question of membership in the monetary system to a referendum.

Shoppers are concerned that stores will use the introduction of the euro to slip in price increases, and there is much evidence to support such fears. But the euro also is likely to usher in a culture of economic competition. With transparency and without the blur of fluctuating exchange rates, consumers and investors will be better able to compare costs and benefits. Many economists argue that the overall effect of the euro will be to drive prices down.